Lifetime Income Providers Tout Ongoing Innovation

The Insured
Retirement Institute (IRI) released its annual “State of the Insured Retirement
Industry” report this week, detailing how ongoing product innovation among
insurance providers and asset managers is improving choice for investors hoping
to convert assets into guaranteed income streams.

The preponderance of new products is very much a positive
development given anticipated demand for lifetime income options in the years
ahead, IRI says, especially options hardwired directly into employer sponsored
defined contribution (DC) plans. This has been a particular area of strong
provider focus, IRI finds, but regulatory challenges remain and plan sponsors
are still somewhat wary of the amount of fiduciary liability that might come along with
in-plan lifetime income.

Heading into 2016, a vast majority of individuals investing
in the DC system say they are open to the idea of in-plan lifetime income
options, but only about one in five plan sponsors feel their company would be interested
in offering these features. IRI notes that ongoing product development is
creating “a wide array of consumer choice regarding lifetime income products,
allowing advisers to create retirement plans that better meet the needs of
their clients,” both participants and sponsors. (Also see “Income Planning Requires Annuity Know-How.”)

IRI finds product providers delivered a variety of new
lifetime income approaches during 2015, with strongest development in the categories
of investment-oriented variable annuities (IOVAs), fixed indexed annuities
(FIAs), and deferred income annuities (DIAs) that meet qualifying longevity annuity
contract (QLAC) criteria.

NEXT: The demographic
trends are clear

IRI President and CEO Cathy Weatherford says the demographic
case for lifetime income, whether inside or outside the plan, “has never been
more pronounced.” Put simply, there is a huge cohort of Americans who control substantial
wealth who are all closing in on retirement and looking for ways to control their
spending and insure against longevity risk.

“These Americans will live longer in retirement than any
generation before, and will be more responsible for their financial security,”
Weatherford says. “This is a tremendous opportunity for the retirement income
industry, and we are seeing market participants expand and fill out their
product shelves to meet this growing need.”

IRI says annuity providers are encouraged by the current
market forces and most feel “well-positioned headed into 2016, with strong
liquidity and balance sheet fundamentals.”

“In addition to healthy financials, the expectation that
interest rates may soon begin to rise should ease macroeconomic headwinds
bearing on the lifetime income market,” the report explains. If interest rates
reach or exceed 3% by the end of 2016—which is admittedly on the higher end of economists’ current
predictions—IRI says income-oriented
annuity sales will likely increase significantly.

From a public policy perspective, IRI cautions that the
Department of Labor’s forthcoming final fiduciary rule is a “wildcard that all
eyes across the industry will be watching.” IRI believes the final form of the
rule will determine the level of disruption to the lifetime income industry and
the consumers it serves.

NEXT: Other key
findings

While lifetime income product providers are optimistic
heading into 2016, the investors they hope to service are feeling anything but.
A rather dismal 27% of Baby Boomers are confident their savings will last
throughout retirement, for example. While this group represents “a large pool
of consumers who can benefit from lifetime income strategies,” it’s less clear
that they will have enough assets on average to shape a livable guaranteed retirement
income plan.

Looking to particular product lines, IRI finds sales of investment-oriented
variable annuities have increased 94% during the past five years, and they now
make up 16% of total variable annuity sales. Fixed income annuities also are “experiencing
strong sales as a fixed-income substitute and on the attractiveness of optional
guaranteed lifetime income benefits.” Sales of FIAs have increased 50% since
2011, IRI explains, further predicting sales of FIAs “should continue to
experience growth with the introduction of new products, including those that
offer ‘uncapped’ growth on the portion of the contract participating in the
index.”

Additional findings show the number of companies offering deferred
income annuities has doubled since 2012. As of mid-year 2015, sales of DIAs
were tracking near 2014 sales of $2.6 billion. As recently as 2012, sales of
DIAs were only $1 billion, IRI says.

Perhaps most impressive: “While only one QLAC product was
available at this time in 2014, there are now 11 companies offering QLAC
products that are available for use in either [individual retirement accounts]
or workplace retirement plans.”